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Should you consider investing in video games?

It might be a good time to jump on board video games...

Article updated: 4 December 2018 10:00am Author: Michael Baxter

Look back over as long a time frame as possible and investing in the right video games companies has been massively profitable; the last couple of months has seen a major sell-off. Is it time to jump on board video games?

Imagine you could invest in cricket. I mean invest in a stock called cricket, as the game becomes more popular, your shares rise in value. With the rise of the Indian economy, I would say the future of cricket is bright.

Imagine you could invest in football, rugby, basketball, ice hockey. You can invest in some of the participants in a sport, but not actually the sport. You can of course invest in Formula One, or Liberty Media Formula One, but as a general rule you can not invest specifically in a sport — there is no cricket, football or rugby share price.

But there is a share price for the sport called Hearthstone. Or indeed in League of Legends.

And that is because a new type of sport has emerged. Cricket and football are ball games — I guess rugby is a ball game, albeit a funny shaped ball. Hearthstone and League of Legends are forms of e-Sports and are owned by Activision and Tencent subsidiary Riot Games, respectively.

The broader picture

But e-sports are just part of the story.

Video games is big business, Newzoo has projected that the market’s revenue will rise 8.2 per cent per year, hitting $143 billion by 2020.

In the long run, the popularity of video games is a function of the power of hardware. As the hardware becomes more powerful, the potential realism of video games increases.

The correlation between hardware and size of industry is not precise in the short run, but over time it is a pretty good match.

That is why shares in Activision are up 55-fold since 1993, when it listed. That is why shares in EA are up 186-fold since 1989 and shares in Take Two Interactive are up 25-fold since 1997.

Unpredictable

It’s an unpredictable market, many many video games companies have been founded, rose to stardom and then gone bust during this period.

But back in 1990, if you had asked who the leading video games companies were you would probably have said Activision and EA.

Not that the story of Activision has always been good — the company did in fact go into Chapter 11 back in the early 1990s when it was called Mediagenic.

Hardware

Actually, I told a porky above. Activision and EA were probably the two leading specialist video games companies in 1990. But Nintendo and maybe Sega sold more games.

The Nintendo share price peaked in 2007, shares today are slightly more than double the 2006 price. The company, though, is a tad older than most video games companies, it was founded in 1889, but I don’t think it produced video games for the Babbage computer.*

Shares in Sega are roughly a third of the price in 2005.

Another company in the video games industry is chip company Nvidia. Its share price is up 11-fold since 2013 when it was floated.

Next stage

Shares in video games companies have taken a fall over the last couple of months, just as they have done with most techs, except Tesla, and to a lesser extent Microsoft.

This may create a buying opportunity.

The real opportunity with video games is just opening up, however.

I believe that augmented and virtual reality will give the business a massive boost — and growth will jump into double figures once these ways of playing games reach an appropriate level of sophistication.

I would say that this is indeed a great opportunity for investors — but don’t pour money into one company, spread your video games portfolio.

*Arguably the machine developed by Charles Babbage in the mid 1800s was the first computer, although it was never fully completed.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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